Barry Jonas of Truist this week upgraded Penn Entertainment to buy from hold after downgrading the stock in August following the ESPN Bet announcement.
Jonas previously recommended holding on Penn after the announcement until timelines and expectations for ESPN Bet were fully understood. His target is unchanged at $23.
Since announcing its transition to the ESPN brand for sports betting from Barstool Sportsbook on Aug. 8, though, PENN was down 41.6% at Monday‘s close of $16.93.
Monday’s close included the beginning of a rally that continued Tuesday after Penn announced it was hiring Walt Disney Company chief technology officer Aaron LaBerge to the same role effective July 1.
No value implied for interactive
The biggest reason for the upgrade back to buy is that the current price assumes no value for PENN’s interactive segment, Jonas said.
The market values Penn’s land-based casino business at 6.4 times next year’s expected EBITDAR. That ranks at the bottom end of its historical range of 6.0 to 8.5 times.
Jonas forecasts $455 million in additional losses for ESPN Bet over this year and next, but the interactive segment is more than just the sportsbook. Even if ESPN Bet failed, Penn has online licenses that bring in $50 million to $70 million of recurring, high-margin access fees, Jonas said.
Its online casino business comes without the high-cost structure of online sports betting (the Disney partnership costs $150 million annually) and can be profitable even with a smaller scale, he added. Penn has a double-digit market share in Ontario through theScore Bet, for example.
Big upside if ESPN Bet hits, though
Jonas noted the potential for “meaningful upside” if ESPN Bet succeeds “to any degree.” Penn gave three examples of estimated adjusted EBITDA potential based on market share in 2027, with 15% of online sports betting and 12% of iGaming leading to $700 million in annual adjusted EBITDA.
At a multiple of 10 times, that would be worth around $40 per share, Jonas said.
Plenty of bettors could take to ESPN Bet if Disney can nail the sports betting integration into the main ESPN app. In a recent Truist survey, 52% of frequent ESPN users that want to see that integration said ESPN Bet would likely become its primary wagering platform, while another 45% said it could become their primary platform.
That said, Jonas expects Penn to maintain current levels of market share until ESPN Bet can improve its parlay offering, which Penn CEO Jay Snowden hopes is strong enough to truly compete in NFL betting.
ESPN Bet top 4 in cash handle
The hardest part about determining where a new brand stands shortly after launch is sifting through all the noisiness of promotions.
ESPN Bet holds an 8% market share on a cash handle basis, according to Jonas. While that leaves the brand significantly behind FanDuel at 40% and DraftKings at 31%, it is just behind BetMGM at 9% and in front of Caesars at 5%.
Promos accounted for 30% of gross handle in November and 12% in December. That fell to 4% in March, which is in-line with the 2023 promo spend averages for DraftKings and FanDuel, Jonas said.
